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How we shrank the US ferrous scrap pool to a puddle

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When petroleum prices took their first quantum leap four decades ago, it triggered a commodity crisis affecting metals like steel and many of the raw materials used to make them.

The U.S. steel industry also suffered a severe coronary back in the 1970s and underwent the equivalent of a quadruple bypass. Old steel mills were closed, coke ovens and blast furnaces were torn down and thousands of workers lost their jobs. The 1973 oil embargo was not the direct cause of the steel industry's problems, but it helped to expose how inefficient some steelmakers were in those days.

A decade or so later, when mini-mill technology was on the rise in the United States and around the world, if you asked some mini-mill executives if they needed to own scrapyards, they pooh-poohed the idea. In some ways, they were like today's drivers who keep buying oversized suburban assault vehicles—better known as sport utility vehicles—or high-powered diesel trucks with four-wheel drive for trips to the local mall. "There's no gasoline shortage," these people will tell you, "just a bunch of greedy oil companies gouging us for all they can get."

There were no ferrous scrap shortages either, some mini-mill executives said back then. There was plenty of scrap—a vast national pool of millions of tons of obsolete scrap—and hundreds of scrap dealers were ready to sell them whatever they wanted. The mine above ground, some called it in those days. The $173-a-ton factory bundles and similar high prices for shredded and heavy melt scrap in the 1970s were an anomaly, they said, unlikely to be repeated.

Companies like Commercial Metals Co. were in both steelmaking and scrap processing. But CMC had already been in the scrap business and it traded all sorts of commodities, not just scrap and steel. When Chaparral Steel Co. built a structural steel mill in Midlothian, Texas, and added a megashredder, some of its mini-mill rivals wondered why. Others attributed the move to the mill's location in central Texas, where processed scrap was not in abundance.

If ferrous scrap prices rose or supplies were tight, there were alternatives like pig iron and direct-reduced iron (DRI). Some steel mills even had their own DRI plants, but abandoned them later—not because of the high price of iron units, but because natural gas prices were rising and made them uneconomical except in a few countries where gas was plentiful.

Fast forward two decades, and the current generation of steel executives has made a 180-degree turn from those old beliefs. Was it simply that the previous generation of steel leaders were near-sighted? They built mini-mills into the powerhouses they are now, and rebuilt what was once seen as a dying industry in this country. But perhaps they were a bit short-sighted on this front.

Today's steel executives started out as young engineers and managers in those companies. These successors face a new challenge today—obtaining adequate raw materials. The current focus on today's stratospheric ferrous scrap prices masks the more pressing issue. Sure, some ferrous scrap prices are close to $800 a ton in the U.S. market and even higher in several scrap-importing nations. But finished steel prices have risen just as steeply and scrap surcharges have ensured profitability for many steelmakers.

Price is not the main issue. It never was. Ask any scrap buyer at a steel mill what will happen if he pays too much for scrap. The boss will howl, he might say, but he'll be looking for a new job if he lets the meltshop run out of scrap.

Ferrous scrap is a limited resource. Nobody makes scrap as a new product, like cars or plastics. Scrap is a by-product of manufacturing processes and our lifestyles, the waste materials that are not discarded in a landfill because there is still some value that can be extracted from them. We junk cars and discard washers and dryers after they are no longer usable. Each year, the growth of the steel industry's mini-mills has drained away more and more of that supposed never-ending stream of junk cars and old appliances. Many manufacturing plants have moved overseas, and with their departure the flow of industrial steel scrap has slowed.

And now, thanks to our own spendthrift financial ways, overseas steel mills see U.S. processed scrap as a cheap raw material. Scrap from other offshore sources like Russia and Ukraine? That's gone or, so we are told, soon will be. Archaic Soviet steel mills have been modernized and they want all of their domestic scrap.

And lastly, those seemingly abundant supplies of pig iron and DRI are not as readily available as once thought. The growth of China's steel industry and its use of the basic oxygen process has taxed the world's iron supplies. Compounding that supply problem has been the consolidation of the world's iron mining industry into a 21st-Century version of the Big Three.

Oil and steel price and supply problems were not unrelated 40 years ago. Nor are they today. Higher petroleum prices are financing a building boom in the Middle East, the region that supplies much of the world's gasoline. That construction binge, in turn, is demanding more steel and, to the chagrin of many U.S. mills, more raw materials like iron and scrap needed by mills there—and here.

Sure, you can turn corn into ethanol and add it to gasoline, but how many millions of acres of spinach will we have to grow to help make enough cold-rolled sheet?

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